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Surprising news from the Yahoo camp late this afternoon, with Yahoo announcing that it will begin a limited test of Google Inc.'s AdSense for Search service, which will deliver relevant Google ads alongside Yahoo’s own search results. According to a statement from Yahoo, the test will apply only to traffic from Yahoo.com in the U.S. and will not include the company’s extended network of affiliate or premium publisher partners. The test is expected to last up to two weeks and will be limited to no more than 3% of Yahoo search queries.

The news sent shock waves through Wall Street, as traders wondered whether the tit-for-tat moves by both Yahoo and Microsoft over the past few weeks has descended into bloodbath territory with the Yahoo/Google move.

Yahoo offers up a dry explanation in a statement today:

“As previously announced, Yahoo’s board of directors is exploring strategic alternatives to maximize stockholder value, including exploration of potential commercial business arrangements. The Company noted that the testing does not necessarily mean that Yahoo! will join the AdSense for Search program or that any further commercial relationship with Google will result. The Company further stated that it would not comment on the nature or timing of any potential relationship.”

Could the Yahoo/Google one-nighter turn into something more serious? For the record, Yahoo claims it hasn't decided to join the thousands of other Web sites that rely on Google to handle most of the text-based advertising that is tied to search requests or other online content.

Maybe that’s the company’s well-honed survival instinct kicking in. Already, the Yahoo/Google dalliance has drawn the interest of political types in Washington. According to a report from Reuters today, at least one U.S. senator is viewing the partnership with increased scrutiny, if not skepticism.

Says Reuters, “A U.S. senator who heads an antitrust subcommittee said on Wednesday that he was watching Yahoo Inc's test tie-up with Google closely "to ensure that it does not harm competition."

"We will be following closely the results of the short-term test alliance between Yahoo! and Google," Sen. Herb Kohl, a Wisconsin Democrat, said in a statement. "Should there be moves to make this agreement permanent, we will examine it closely in the Antitrust Subcommittee to ensure that it does not harm competition."

Meanwhile, back in Redmond, Washington, Microsoft reacted harshly to the Yahoo/Google announcement. Microsoft General Counsel Brad Smith immediately responded by saying the agreement "would consolidate over 90% of the search advertising market in Google's hands."

"This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo," he said in a written statement. "We will assess closely all of our options. Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers."

Will the Yahoo/Google news impact the Yahoo/Microsoft deal? Fair question. As I’ve said on this blog many times, Wall Street hates uncertainty. And the Yahoo/Google deal raises the bar on uncertainty to new levels.

Reading between the lines, it’s no stretch to conclude that Yahoo is already in “Plan B’ mode, if the Microsoft deal blows up in its face. Says analyst Crawford Del Prete of International Data Corp., in an interview with Marketwatch today, "To me, it's basically a shot back at Microsoft that Yahoo is willing to explore other creative models as a way to accelerate revenue growth and valuation. Microsoft's response is not surprising. The reason they are jumping into this is to try to gain more of a foothold in the digital marketplace. Anything that Yahoo does that brings them closer to Google is going to be threatening to them."

Del Prete is hardly alone. Citigroup analyst Mark Mahaney predicted back in February that there was roughly a 25% chance Yahoo would pursue a search-ad outsourcing deal with Google. "If there really is an outsourcing deal announced here, what Yahoo is essentially doing is saying no to Microsoft," Mahaney told Marketwatch.

From here, those odds have increased this week, thanks to Yahoo and Google.

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Last Post by rybalkin
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well this could be expected. Google almighty is expanding his search universe.

just wondering if it is only going to be a test or an outset of a cooperation between two giants.

hope this is not going to be something like Gargantua and Pantagruel story

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